Return Dispersion Quadrants for Switching Between Trend and Mean Reversion

Summary

This strategy classifies recent pairs of consecutive returns into four sign-based quadrants and selects the quadrant with the most observations over a rolling sample. A dominant quadrant with two nonnegative returns activates a trend-following mode; a negative prior return followed by a nonnegative current return activates a mean-reversion mode. The remaining quadrants suppress new entries.

In trend mode, the script buys when price rises above the previous close and sits above a 20-period SMA. In mean-reversion mode, it buys when RSI(14) crosses below 35. Both entry types use a 5% profit target and 15% stop based on entry price, but the stated position allocations differ: 10% of initial capital for trend trades and 50% for mean-reversion trades. The page says the method is intended to demonstrate use of the dispersion indicator, and provides no performance results. The regime labels, long-only signals, and fixed exits are design choices rather than evidence of general profitability.

Key ideas

• The regime signal comes from the most frequent quadrant among recent consecutive return pairs.
• A dominant positive-positive quadrant activates a trend entry requiring a higher close and price above the 20-period SMA.
• A negative-to-nonnegative return quadrant activates a long entry when RSI(14) crosses below 35.
• Other dominant quadrants block new trades, and the chart marks those periods.
• The two modes use different stated capital allocations and share fixed percentage exit levels.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.